Why Bosses Should Worry When Employees Trade Pre-IPO Stock Options

Last Updated Apr 19, 2010 7:45 PM EDT

SharesPost, which has become an online watering hole for the pre-IPO set, acts as a meeting place for employees -- who hold shares from such companies as Facebook, LinkedIn, Twitter, and Brightcove -- and those who want to purchase the stock. Now SharesPost will work with registered brokers who have expertise handling stock from one of the companies that SharesPost follows. That's great for share-owning employees -- and a real problem for the employers.

For decades, stock options and grants have been the engine oil for tech companies that are still private. A new business can attract top talent willing to trade cash for stock that, if all goes well, represents a chance for a big pay-off. There is an additional benefit to the employer: Workers whose wealth is in shares not readily traded on stock exchanges generally must stick around until an IPO or acquisition happens to cash in and head off into the sunset. In effect, the shares become gold-plated handcuffs.

The SharesPost announcement creates a growing market for those illiquid shares. Not only is there information on how much someone might make by unloading, but those who own shares can talk to a broker who knows the company and might be able to match them with buyers. If it works for SharesPost and others like SecondMarket, you can bet that additional firms will try to work their way into the space.

And that's the bad news for employers, because the system provides a skeleton key for those golden handcuffs. Last month, SecondMarket saw $70 million in private share trades, with 41 percent of the volume coming from Facebook stock.

That was likely one of the reasons Facebook clamped down on insiders selling shares to outsiders earlier this month:

The new policy comes as the social network last year helped arrange for employees to cash out some of their stock by allowing them to sell a portion of their shares to Russian investors Digital Sky Technologies for $14.77 a share. It also comes as Facebook has taken a number of steps to prepare for an initial public offering, including creating a second class of stock with strong voting rights. But the company says it is in no rush to go public and board members have said it won't do so this year.
This also shows how tightly the cuffs can chafe, given that Facebook sellers on SharesPost are asking upwards of $55 a share, making the $14.77 offer upwards of a 73 percent discount. Quite the incentive to wait around until a better offer comes along -- whenever a company's CEO and venture investors decide they'll get around to allowing it.

Image: stock.xchng user andimedia, site standard license.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.